1. Olivier De Jonghe Discussion of “A market-based measure of credit quality and Banks’ performance during the subprime crisis” By Martin Knaup Wolf Wagner

2. -Information impounded in bank asset prices -Stock return decomposition: -Systematic risk (market beta) -Interest rate risk (Flannery and James, JF 1984) -Inflation (Dermine and Lajeri, JBF 1999) -Exchange rate risk -Term risk (Viale et al., JBF 2009) -Default risk -… Bank asset prices Emerging scholars in Banking and Finance

3. -Default risk factor: -Yield difference between Baa and Aaa corporate bonds -Pros and Cons of your approach + High and Low risk  Credit risk indicator ( H/(H+L)) -Short time period -Only 35 substituents in cross-over index  CDS spreads vs bond spreads: are they cleaner?  may turn – into = Credit quality Emerging scholars in Banking and Finance

4. “ Our proposed credit risk indicator differs conceptually from other market-based measures, such as DtD or (bank) CDS spreads. While these measures focus on the current riskiness of a bank, the CRI measures the perceived exposure of a bank to an economic downturn (in which high risk assets presumably perform worse than low risk assets).”  Still depends on predicting an economic downturn -Time-varying betas (regime switches) -Tail beta: extreme system(at)ic risk -Hartmann et al. (2006) -De Jonghe (JFI, forthcoming) On the motivation Emerging scholars in Banking and Finance

5. -Order of factors/shock (Choleski) -In this paper:  XO versus IG is irrelevant  Role of market factor Orthogonalization Emerging scholars in Banking and Finance

6. Mapping between model and estimations Model is in MVE= P*NOSH – ∆p= absolute change in bank’s share price – Not relative change, i.e. return – How did you normalize stock index? Correspondence to return-based market models? – Market beta of 0.03 – What are loadings of CDS XO, CDS IG in return model? – Similar CRI? Absolute price changes Emerging scholars in Banking and Finance

7. Is average CRI of 0.11 plausible? Multiple regimes in CRI? Calm vs stress? What is economic significance of XO and IG? To what extent does fit of regression increase? Are bank-specific coefficients on XO and IG significant? INTERESTING PAPER! Other comments Emerging scholars in Banking and Finance